How class warfare is hurting the real estate market

Rentiers and debtors have long fought for the upper hand, and the United States economy reacts to the financial struggles of each inconsistently. What can be done to ease financial disparity — and how will this equilibrium benefit the real estate market?

Income and economic disparity among Americans

In the years since the housing crash and financial crisis of 2008, the unequal distribution and generation of wealth among United States citizens has become increasingly apparent. Despite forward strides in employment and the ongoing housing recovery, the economic scale is struggling to stay its tilt towards disproportionately favoring those who earn passive income, also called unearned income. Today, the difference between working for a living and reaping investment income is painfully obvious — and it’s bad for real estate.

This difference manifests in two main economic classes among Americans:

rentiers, who use accumulated money to make money by placing their wealth in assets which produce passive income; and

debtors, who use their labor or skills working for paychecks, including self-employed business operators, to fund their living expenses until retirement.

Rentiers and debtors go by many names, depending on their particular financial situations or role in a real estate transaction: landlords versus tenants, lenders versus property owners, etc.

Perhaps one of the starkest monikers to emerge in recent years is “The 1%” (rentiers) and “The 99%” (debtors), a statistical divide made part of today’s conversation by the fleeting Occupy Wall Street movement which harnessed the public’s attention in 2011.

Regardless, the elite 1% are not inherently evil, nor are the 99% automatically earnest laborers — despite the reductionist social sentiments that too often dominate the discussion.

An individual’s involuntary circumstantial upbringing and financial awareness most often factor significantly into where they end up on the economic spectrum. However, the U.S. economic structures do have a firm hand in how rentiers and debtors earn their income and how they are treated when they experience financial distress — and this guiding hand is not unbiased.

Debtors reliant on rentiers’ assets

Debtors constitute a wide, sturdy base on which rentiers build their wealth. Debtors can earn anything from minimum wage to a six-figure salary — so long as they pay their dues to the rentiers.

As mentioned above, rentiers hold the assets debtors need to function and maintain their quality of life. For example, a rentier may live off rental payments generated from multiple income properties they own— paid by the debtors occupying the properties.

This holds significant ramifications in today’s ownership and rental markets. California tenants in major (mostly coastal) metropolitan areas are wrung for their last cents in overpriced urban rental units, while landlords and property owners bask in the fruits of their accumulation of wealth from ultra-high tenant demand. However, some landlords play both the role of rentier and debtor, owing mortgage debts on their rental income investment properties.

Matthew Rognlie, an economist at Massachusetts Institute of Technology (MIT), published a 2015 research study analyzing this effect. The economist concluded the high demand and lack of supply (inventory) gives housing the most significant portion of capital income growth today that is realized by rentiers. However, for the 1%, the capital gains tax is capped at 20% — allowing for significant retention of the excess income presently flowing from tenant demand.

Meanwhile, the 99% are stuck with higher tax rates despite their distantly lower income. This leads to greater buyer purchasing power for rentiers than debtors, although debtors currently have an exponentially higher need for financially feasible housing than rentiers. Rentiers simply use wealth to provide their debt-free housing, not monthly wages for rent or mortgage payments.

Actions to remediate such an inordinate allocation and taxation of wealth among rentiers and debtors can have an unintended destabilizing effect.

Attempts to alleviate such disparity are pushing rentiers to abandon what they deem unproductive enterprises in search of debtors able to supply more “reasonable” (read: lucrative) returns. For example, the induction of steeper development fees across Oakland is persuading developers to leave behind needy residents for other municipalities where developments encounter minimal expenses and bring maximum returns from able debtors — a population evacuation which will entice rentier landlords to follow.

Accordingly, Rognlie suggests local policymakers ought to closely monitor housing costs when considering remedies for disproportionate wealth among income tiers. Restrictive zoning and limited construction opportunities artificially force housing costs up, reinforcing the aforementioned prominence of housing in capital income cycles — a problem to which first tuesday has frequently called attention.

Permissibly parasitic rentiers and the economic consequences for everyone

The issue of underwater homeownership sparked a renewed awareness of crippling financial class disparity in the wake of the Millennium Boom. Though negative equity is no longer the predominant issue it once was in California (March 2016 saw the lowest mortgage delinquency rate since 2007), current economic policies favoring rentiers still foreshadow steep pitfalls for debtors – most homeowners – in the years to come.

Basically, you can think of the economy as the 1% getting the 99% increasingly into debt, and siphoning off as interest payments and other financial charges whatever labor or business earns. The more a family earns, for instance, the more it can borrow to buy a nicer home in a better neighborhood — on mortgage. The rising price of housing ends up being paid to the bank — and over the course of a 30-year mortgage, the banker receives more in interest than the seller gets.

Hudson extends this point to reflect potential ramifications for the American economy, as mortgaged property owners and renters feed their earnings into expensive homes and rental payments (all for the financial end benefit of the rentier class). With all their financial attention focused on myriad debt payments, including mortgages, student loans and consumer credit, residents have little surplus cash for savings or to expend on goods and services for an enhanced standard of living (or invest in income-generating real estate assets, for that matter). Thus, lack of debtor participation for lack of disposable income wounds the larger economy and real estate sales in particular.

However, rentiers and pseudo-rentiers — comprised of syndicators and Wall Street bankers who earn their income aggregating and managing the wealth of others into an investment product on which they earn interest — continually garner wealth from the management of debtors’ overextended financial obligations, which are encouraged by government policies on mortgaged housing.

Hudson refers to this as a form of financial parasitism, in which rentiers and pseudo-rentiers reap the benefits of tangible production by others, and transfer it to the more conceptual arena of finance and investment.

In other words, rentiers and their upper-tier middlemen leach wealth from the laboring and self-employed masses (both from debtors and other rentiers), all the while pretending to contribute to the active production of goods and services which influences the cyclical fluctuations of income for the laboring class.

Resolving debt disparity

How then can the gap be closed?

Often, it can’t; those born into the rentier class learn to be rentiers through exposure and pursue that method of economic survival by virtue of upbringing — inculcation by family, like-type friends and elite schooling.

Alternatively, those born into the debtor class generally learn to be debtors by earning their income off their labor and services they supply — the hardworking American, rather than smart-working American. Thus, the cycle continues, a constant turn of the Rota Fortunae which in a democracy somehow sustains the rentiers’ position at the top.

But is this all just financial fatalism?

There is always potential for change, for those who understand the system needs some reordering. When U.S. economic policy is modified to provide debtors the same benefits rentiers enjoy — particularly through tax reform — the mass of debtors generate more disposable income to balance financial disparity.

How we collectively solve this riddle is highly contentious and deeply tainted by political allegiances, but doing so will certainly re-instill some balance to the system and encourage a more equitable sharing of our resources at the source of income. The sharing of corporate earnings at the moment for setting salaries and business profits — the stakeholder versus the stockholder and corporate bondholder — reflected in the minimum wage and higher up the pay ladder makes homeownership possible as the escape from permanent tenancy.

Balance between rentiers and debtors levels the real estate market. When debtors are able to avoid getting stuck beneath anvils of perpetual debts, they are better able to invest their savings into assets, such as a home. Although buying a home means obtaining a mortgage for nearly all debtors, their return in equity buildup will stave off the compounding indebtedness to rentiers that comes with renting. Rentiers keep their passive income through mortgage payments, and debtors slowly gain value through the steady increase in their home’s equity through amortization.

Eventually, homeowner debtors who have paid off their mortgage — virtually freed from eternal debts imposed by rentiers — can invest their life earnings into passive income-producing assets, like a rental property. Thus, debtors are able to join the rentier ranks at last. However, the likelihood of paying off a mortgage in full in today’s savings-challenged economy is minimal; but one can dream.

7 Comments

Im amazed at the political bias used in any article involving real estate, while I have my views, Im not going to share them because of the crap that it would stir up. While renewing my license last year, the author of one of the chapters obviously had a problem with a political issue involving real estate taxes. It almost makes me embarrassed to call myself a professional. I truely wish we could leave the political bias out of the real estate. 99% 1% who cares? Live your life and quit blaming others for your iniquities. If you want to make a difference, run for a local office, knock on doors, bring awareness to an audience that will listen. Someone once told me, act locally, and think globally. Dissention has come to our homeland, and it’s not going away anytime soon. The cancer and bias can all be traced back to the liberal ideology being taught by our government controlled schools and colleges. This stems from the absence of God and are unwillingness to acknowledge his sovereignty. Just one man’s opinion, saved by His blood and grace……

This is not an economic issue or a “class” issue no matter how much the writer(s) would like it to be. It is a values issue. The article comes close to this in these two statements: “…those born into the rentier class learn to be rentiers…” and “…those born into the debtor class generally learn to be debtors…” but is marred by the “born into” part. Most of those who become rentiers learn to be either through formal education or on thier own, although it is clearly true that some are born into it (so what). What rentiers learn or just figure out on thier own, is to live as frugally as one can reasonably do and save for the future and then invest in that future. Additionally, they figure out ways to make themselves more useful to the society through education, hard work, and generally making themselves as useful to thier employers or customers so they can earn more income. What debtors generally do is live the maximum lifestyle today that their income will bare and mortgage their future. Many of these people also get just enough education and skills and work just enough to get by and sometimes have little concern as to how useful they are and then complain about thier situation, like the “occupy movement” sited in this article. In the end, it’s a choice. A Choice and values that have been forgotten by far too many Americans. Attempting to “fix” the “problem” through political means will ultimately make things worse, as it always does. The fix is in teaching the proper values that will allow almost anyone to become financially successful, unless of course we get too many political “fixes” that will bury those values under a mountain of class warfare lies and rhetoric.

In order to become a rentier, one has to first earn money, then pay taxes on it, then try to save some money in order to invest it. When one earns money, one pays the same “higher tax rate” that the 99% are subject to. For those who do save money, the cap gains tax rates encourages them to reinvest it. Capital gains tax rates are available to everyone, including the 99% and, encourage investment. Sadly, the author’s article slanders those who are disciplined in saving and investing money. I would think that the author agrees with President Obama’s comments regarding financial achievement when he said “. . . You didn’t build that. . . it was the roads, the government, . . . that helped you build it.”

I am simply blown away by the simple-mindedness of this editorial piece masquerading as an educational article. While I would certainly agree that there is a problem with the 1% garnering the majority of wealth. In fact, this seems more like something right out of the Occupy Wall Street movement.

There are many factors at play when it comes to real estate holdings and the value of same. Simply lumping all renters into a “class” of people being taken advantage of and landlords perpetrating the injustice is preposterous.

Then there is the villianizing of the lender. If no lender were willing to loan there would be almost no home-ownership! No doubt there are problems and issues regarding housing affordability and the example you give about Oakland, one of the most liberal cities in California, and their zoning, planning and permit fees are more egregious than any bank.

If you want to have a conversation regarding housing affordability you need to separate wages from real estate. While you need the higher wages to buy; real estate is not the root of the problem. Nor is renting to someone that cannot afford to buy in an area that they want to live. There is a demand for rental housing and while there are big players that are able to have an advantage, I’m pretty sure the majority of rental properties are supplied by some of the very people you want to call “debtors.”

In other words, why don’t you start a conversation about how to better the situation with education at the top of that list. Stop promoting the idea that you born to your lot and that’s all there is… Most of this problem rests squarely on the shoulders of those you aim to show as victims of the “rentier class.”

There are a good many employers out there that cannot find educated and skilled help. There is something like 5.8 million job openings and the majority are in the higher paying sector. If more people would pursue an education in the science and technology fields it would generate even more jobs and raise the wages of workers in the lower tier as there would be a shortage of unskilled workers.

“There is something like 5.8 million job openings and the majority are in the higher paying sector. If more people would pursue an education in the science and technology fields it would generate even more jobs and raise the wages of workers in the lower tier as there would be a shortage of unskilled workers.”

No, not quite. We are graduating record numbers of highly-skilled, highly-educated young people who are working in retail and coffee shops, etc. They are not being offered jobs as engineers, scientists, pharmacists, etc., as the usual employers of our STEM-educated young people are instead clamoring to import more H1Bs. Look around. Ask recent college grads. Thousands upon thousands are at your local Starbucks, or waiting tables, or opted for grad school not because they really wanted to, but because they were avoiding getting dinged by student debt. The idea that we lack skilled STEM people is pure propaganda.

Robert, I beg to differ. While you are right that some “highly educated” people work in retail and coffee shops they are not the people with educations in the STEM courses! I have 3 children 29, 29 and 25. Two graduated with 4 years degrees in STEM and they have been employed with several companies now right out of college… the 3rd one did not graduate but is in sales and doing quite well thank you very much. Based on this and other experience (friends and relatives included) I think it is you sir that feeds on propaganda. And, if you know someone with a degree in the STEM-educated that are working at Starbucks there is something else going on, like they will only use their education in a very narrow capacity or won’t start at a lower wage rate than they have predetermined is befitting them.